With little economic news this past week in the U.S., markets focused on disappointing corporate news, overseas announcements, and moving funds to safety after a robust 2013. After starting the holiday-shortened week positive on Tuesday on the heels of the International Monetary Fund boosting its forecast for global growth this year, stocks fell like a stone into Friday’s close. Besides mixed earnings results, Thursday’s report on China’s January flash manufacturing PMI sliding to a six month low negatively impacted the markets. The sell-off picked up steam on Friday as stocks dropped the most since June. The indices fell the most in a week since 2012. The S&P 500 Index (SPX) fell 2.6% but the Dow Jones Industrial Average ($DJI) led the benchmark’s down 3.5% for the week. The tech-heavy Nasdaq (NDX) fell 1.7% and small caps (RUT) finished the week down 2.1%. For the year so far, the Dow Industrial have slid 4.2% and the S&P 500 (SPX) is off by over 3%.
With the massive slide in equities, Volatility shot up 45% for the week! The CBOE Volatility Index (VIX) settled above the $18 handle for the first time since mid-October. Complacency was built-in the option markets as the ‘Risk-On’ trade worked well for the last year or so. The scramble was felt in option premium as investors and traders tried to cover their downside risk. We should expect volatility to remain elevated if the markets continue to react negatively in stocks. Last week’s sell-off seemed different from previous downturns in 2013 as nobody was buying the dips on Friday. If overseas markets slide on Sunday evening, we will most likely see further downside in the U.S. to start the week.
Treasury markets were positive on the melt-down in stocks this week. The benchmark 10-year yield finished the week down at the 2.73% level and is now firmly below the 3% level. Investors fled to the safety of bonds as flows were to risk-off trading. Comments out of Davos by the IMF’s Lagarde showed concerns on deflationary risks in the near-term. Achieving inflation targets near 2% seem to have little chance of success at this point. Natural Gas futures (/NG) spiked sharply this week as the cold-snap continued in the Midwest and out East. They rose 6.7% on Friday alone and were up 22% for the week as demand continues to increase.
There is a lot on the calendar this week. But the focus will be on Wednesday’s FOMC decision to taper faster or slower. Housing is the next emphasis as this sector has slowed. Recently, home prices have decelerated according to FHFA and we get Case-Shiller’s version this week. Existing home sales were sluggish last week and we get another view with new home sales. Manufacturing has been the recent source of economic momentum and durables orders will be a key update on Tuesday. Earnings season is also in full swing as one-third of the Dow Industrials report this week along with a quarter of the S&P 500 companies. Watch for the quarterly report out of the tech giant Apple (AAPL) to set the tone on Monday after the close. U.S. equity futures (/ES) open at 5 pm CT today and will give us a better idea about Monday’s open for stocks.
